An International Monetary Fund (IMF) mission, led by James Morsink, held discussions with the Hungarian authorities during May 7-18, 2009 as part of the second review of the country’s Stand-By Arrangement (SBA). The IMF mission worked in close cooperation with a parallel mission from the European Commission, carried out in the context of the European Union balance of payments assistance. At the conclusion of the visit, Mr. Morsink made the following statement:

“The mission reached a staff-level agreement with the authorities on a package of policies that aims at completing the second review under the SBA. We expect to finalize a Letter of Intent that summarizes this agreement, with a view to allowing the IMF Executive Board to consider the completion of the second review of the arrangement in late June. The completion of this review will enable Hungary to draw SDR 1.26 billion (about €1.43 billion).

“Macroeconomic and financial policies in Hungary are on track. The end-March quantitative targets on the central government’s primary balance, central government debt, inflation, and net international reserves, as well as the structural targets related to pension reform and government lending to banks, were all met. A structural target on strengthening the safety net for banks was largely met and further progress is under way.”

“The global environment has deteriorated sharply since the first review in March 2009. The fall in demand for Hungary’s exports and tight external financing conditions have worsened Hungary’s economic outlook. Real GDP is now projected to contract by 6.7 percent in 2009. As a result, tax revenue will be lower than envisaged and nonperforming loans higher than expected.

“The key objectives of the program remain to improve fiscal sustainability and preserve the stability of the financial sector. To contain the government’s financing need in the short term and reduce it over the medium term, the authorities are implementing comprehensive structural reforms aimed at permanently reducing government spending and bolstering potential GDP growth. On the basis of these measures, the fiscal deficit is projected to be 3.9 percent of GDP in 2009, to fall modestly in 2010, and to be below 3 percent of GDP in 2011. In the financial sector, the core measures strive to maintain strong levels of capital in the banking system and investor confidence.

“The continued success of the policy package will be a shared responsibility between all stakeholders in the country and the international community. The IMF, in close cooperation with the European Union, will continue to assist the Hungarian authorities on how to adapt to the challenging global conditions and catalyze financing as needed.”